The Best Way to Find Market-Beating Investments

Investing Strategies

Tuesday, February 21, marked the SEC’s first quarterly deadline for Form 13F filings of 2023. Money managers of all stripes must file this form with the SEC 45 days after the end of every calendar quarter.

Comparing this quarter’s filing to previous filings allows us to see what the nation’s hedge fund, mutual fund, endowment, pension, and other institutional fund managers have been doing with their clients’ cash.

It’s one of the best ways to find market-beating investments. Here’s what I found this time…

Bull and bear textured with stock market graphics

Back in the good old days, we had to do this by hand. Even in the early days of electronic retrieval, we would have to log into a not-so-easy-to-use database, print the reports out on a good old dot matrix printer, and compare this quarter to the prior one to see who was buying what.

It is a lot easier today as the filing is instantly available online, and there are several websites you can pay to make the comparison in the blink of an eye and spit out the results.

The financial media covers the 13F deadlines like a sporting event. Investors rush to buy what Warren Buffett, Carl Icahn, and others have been buying recently.

This is a lot like betting on aging superstars in sports—ill advised.

In the investing world, it is not that investors like Warren or Carl have lost their skills. Their objectives and situation have changed.

Last week’s headlines were all about the hedge fund superstars and the legendary investors of the past 25 years.

Today I am going to let you in on a little secret.

I have been following 13F filings since the 1980s. I remember how excited we all were when Henry Emerson started a service that did the heavy lifting of storing the filings in the late 1980s.

I have stolen so many successful ideas from great value investors, distressed asset specialists, and other superstar investors, that I thought of opening a firm and calling it Pirate Capital. I was not happy when I found out that Tom Hudson had already stolen the name.

Over the years, I have discovered that one group of investors consistently outperforms other fund managers.

It is not the hedge fund traders or growth stock gurus. It is not even the activist investors. It is a group almost no one thinks of when it comes to portfolios of publicly traded securities.

It is private equity investors.

PE investors have portfolios of publicly traded securities. Some of the holdings are companies where they did a partial IPO and still hold shares of a former buyout. Some are just securities that the fund managers think are undervalued.

Whatever the reason for the purchase, some PE managers have a stellar track record and are worth following.

I will save you all the number crunching and details and just tell you the three best private equity managers to follow. If you owned a 30-stock portfolio consisting of the top ten holdings of these three funds, you would have crushed the stock market indexes over the past 15 years. These managers are:

  • Apollo Global Management Inc. (APO)
  • KKR & Co. Inc. (KKR)
  • Leonard Green & Partners

Most of you will do nothing with this information. However, a few will add checking on these three to your investing playbook and will thank me later for sharing the information with you.

There is a common theme to what these three top-performing investors did in the fourth quarter of 2022 to get ready for the first part of 2023, and it is powerful information. Or specifically, what they did not do: none of the three spent a lot of money buying stocks.

Leonard Green made small additions to portfolio companies, including The Container Store (TCS), JOANN Fabric (JOAN), and Catalent (CTLT).

Apollo made small additions to companies they acquired via a SPAC deal, including Global Business Travel Group (GBTG), the operator of American Express Global Business Travel. The value-oriented PE firm also continued to play the SPAC arbitrage game. Apollo has done very well with this trade since the SPAC boom of 202 and appears to be determined to run the game all the way out to the end.

Other than that, Apollo’s purchases included high-yield new issues and put options on stocks, high-yield indexes, and gold, as well as some calls and puts on a handful of stocks.

Apollo also bought shares in an energy play that could have explosive upside. Earthstone Energy (ESTE) is an exploration and production company that operates in Delaware, Midland, and Eagle Ford basins that are in Texas and New Mexico. Earthstone recently hit my own radar when it doubled its buyback plan to $500 million. The company is also paying down debt, so it is using cash in two of my three favorite ways to build value.

KKR, in the meanwhile, also limited most of its fourth-quarter activities to the purchase of individual high-yield bonds. The only stock the company purchased was Mirion Technologies (MIR), which makes detection systems for nuclear energy, media, and research companies. The stock leaped about 15% higher after reporting better-than-expected losses and projected its first profitable year in 2023.

I will not chase it in the short run, but given my bullish stance on nuclear energy, I will be closely digging in and watching this stock, which went public via a SPAC merger in 2021, combining with a Goldman Sachs-led SPAC.

The smartest money was buying bonds, not stocks, as 2022 came to a close.

I see nothing in the current economy or markets that is likely to have made any of the big three change their stance.

You can make money from 13F filings but not from the reports mentioned in the headlines. So, in the next few weeks, we will spend some time digging into how to use these valuable reports and whom to follow.

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